Banks continue to invest in innovation

MANILA, Philippines - After the crisis, banks continue to increase their investment in innovation in retail financial services in order to gain competitive advantage and gain first-mover advantage over their peers.

In a survey conducted by Asian Banker Research across a diverse group of 59 senior bankers across 14 key Asia Pacific countries, banks have defined successful innovation as a new idea or method which is able to create value for the customer or the company itself, and one that contributes to the bottom line of the institution in a sustainable manner.

The survey and research report identified six areas of disruptive innovation, which the respondents named the core innovation areas for the next few years. The innovation in areas such as disintermediation, network distribution, service applications and customer relationship management are likely to change the way the retail financial services industry are run in the near future.

Despite the need for innovation, only 18 percent of the surveyed banks have a formalized strategy. Even roughly nine percent have a dedicated innovation department to coordinate their efforts.

The research report also clearly shows that the most successful innovative financial institutions in retail banking in the region acknowledge innovation as a deeply embedded process, a collective ownership across unit heads, teams and departments, synthezising and leveraging on a variety of changes in information technology (IT) and technology, processes and operations and successfully providing the human interface both for front line staff and customers.

Since the cost of market entry is relatively high and with the exception of Korea, Malaysia and Indonesia, retail financial services markets are tightly regulated, often favoring domestic banks, domestic players do not see a threat from innovative new players

While 29 percent of emerging market banks perceive IT as a barrier, mature markets have a considerably higher proportion at 68 percent. The challenges appear more in managing the interface between technology, operations and personnel.

Some of the key findings from this survey are:

– Prototyping is an important and useful element for building institutional knowledge to manage innovation, which often goes through multiple rounds of incremental improvements.

– Most banks follow a tactical innovation approach which is needs-based, reactive and considerably smaller in scope than strategic innovation.

– While banks have focused in the past on innovation in network distribution and products, we expect that the most significant innovations are going to take place in payments, mobile banking and customer service delivery and service applications.

Many of the most powerful innovative products introduced in the last 10 years continue to deliver above average market growth and revenue. They have contributed significantly to customer stickiness, loyalty and wallet share.